By Paul Long
Securing financing for a business acquisition requires a thorough understanding of both the business being purchased and the financial profile of the guarantor. This pre-qualification checklist outlines the critical factors lenders evaluate to determine readiness and risk. It’s designed to guide conversations, surface potential concerns, and ensure all parties are aligned before moving forward.
Business Evaluation
A successful acquisition begins with a clear picture of the business’s operational health and future viability.
- Cash Flow Consistency
- Is the business generating stable, predictable income?
- If income is sporadic, a seller note may help bridge cash flow gaps.
- Investigate fluctuations in Gross and Net Income—are they seasonal, market-driven, or tied to internal operations?
- Seller Dependency
- How reliant is the business on the current owner’s relationships, expertise, or daily involvement?
- A seller note may be warranted if the transition poses risk due to high dependency.
- Industry Conditions
- Assess current trends, regulatory shifts, and competitive pressures.
- Is the industry growing, stable, or in decline?
- Valuation and Purchase Price
- Is the price supported by cash flow and market comparables?
- Consider third-party valuation or broker insights to validate pricing.
- Transition Plan
- What is the seller’s role post-sale?
- Is there a structured handoff period or consulting agreement?
- Post-Sale Business Plan
- Does the buyer have a clear strategy for operations, growth, and staffing?
- Are there plans for rebranding, expansion, or restructuring?
- Retention of Key Personnel
- Will essential employees and managers remain after the sale?
- Their continuity can be critical to maintaining customer relationships and operational stability.
Guarantor Assessment
The strength and preparedness of the guarantor are equally vital to loan viability.
- Industry Experience
- Does the buyer understand the nuances of the business’s sector?
- Prior experience can reduce transition risk and improve operational confidence.
- General Business Acumen
- Has the buyer managed teams, budgets, or business operations before?
- Broader experience supports adaptability and problem-solving.
- Creditworthiness
- Review credit scores, payment history, and existing obligations.
- Strong credit signals reliability and financial discipline.
- Down Payment Availability
- Is the buyer contributing sufficient equity?
- Borrowed down payments are generally discouraged and may weaken the application.
- Potential for Disruption
- Could the buyer unintentionally impact cash flow through changes in pricing, staffing, or customer engagement?
- Consider personality fit, leadership style, and operational philosophy.
- Collateral Commitment
- What assets is the guarantor pledging?
- Are they “all in” with personal guarantees or tangible collateral?
- Personal Income and Liquidity
- Does the guarantor have secondary income to support personal expenses if the business underperforms?
- Is a minimum draw required to sustain their household? If so, this must be factored into the business’s cash flow.
- Post-closing liquidity is essential—can the buyer support themselves and their family without immediate business returns?
Final Thoughts
Pre-qualification is more than a checklist—it’s a strategic lens into the viability of the acquisition and the borrower’s readiness. By addressing these factors early (Also good to put all of this in your business plan), lenders and buyers can align expectations, mitigate risk, and build a foundation for long-term success.
